MUMBAI: Indian government bonds saw their biggest single-day fall in nearly two months on Monday as investors pared positions ahead of the central bank's monetary policy review on Tuesday, while weakness in the local currency also hurt.
The Reserve Bank of India will probably wait until the second quarter of next year to loosen policy as it wants to cool inflation before trying to spur growth, a Reuters poll found ahead of a policy review meeting on Tuesday.
Traders said weakness in the rupee on Monday, which matched its 1-1/2 month low hit on Friday, also hurt sentiment for debt prices.
"The weak rupee and selling by foreign investors weighed on the debt market today as also some position paring was seen ahead of tomorrow's policy," said Bekxy Kuriakose, head of fixed income trading at Principal-PNB Asset Management.
"The market is expecting a cut in the SLR (statutory liquidity ratio) and HTM (held to maturity ratio) tomorrow and Rajan's comments as also the policy tone will be critical. There could be some selloff seen tomorrow if there is a SLR/HTM cut, given the current market positioning," she added.
The benchmark 10-year bond yield ended up 5 basis points at 8.49 percent, its biggest single-day rise in yield since Aug. 8. The yield touched 8.50 percent during the session, its highest level since Sept. 18.
Traders expect the 10-year paper to hold in a 8.46 to 8.56 percent range until the outcome of RBI's policy review.
Standard and Poor's rating outlook upgrade has already been digested by the market but the impact on flows going ahead remains key, they added. Foreign funds have bought debt worth $19.5 billion so far in 2014.
India regained its "stable" rating from Standard and Poor's on Friday, more than two years after an embarrassing downgrade, in a validation of Prime Minister Narendra Modi's ambitious agenda of economic and fiscal reforms.
The movement in global crude oil prices will also be crucial for bond markets in the near-term due to the impact on domestic inflation.
Brent crude oil fell below $97 a barrel on Monday, moving closer to a two-year low hit last week as weak data from major buyer China and a stronger US dollar added to pressure from strong supplies.
In the overnight indexed swap market, the benchmark five-year swap rate closed 5 bps higher at 7.83 percent, while the one-year rate rose 3 bps to 8.41 percent.
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